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Coming back to earth: Land prices have leveled off, says broker Eric Anton of Eastern Consolidated (r.) who brokered with partner Ron Solarz (l.) the land sale for the Link condo under construction at 310 West 52nd Street. Residential property developers are repositioning themselves to survive in a New York City real estate market that may be losing steam for the first time in a decade.

Market reports show declining sales prices for some residential units, and rumors are swirling that growth in land prices has stalled. Construction and fuel costs are mounting as interest rates climb. Lenders are reconsidering proposed projects by new developers in marginal areas.

Then again, all of this may be hype by those, including the media, who persist in talk of a real estate "bubble."

David Sigman, senior vice president of national development company LCOR, which recently purchased land for two Manhattan projects, echoed that sentiment, saying those in the industry remain cautiously optimistic.

"I think you have to analyze the statistics at the right level, and not at the kind of one-line newspaper headline level," Sigman said.

But the fact remains that the data don't add up to the sort of hyperactive market seen over the past few years. And while condominium sales are flagging, construction costs are increasing, especially in the aftermath of hurricanes Katrina and Rita, which have drained laborers from the area. Those natural disasters have also driven up fuel prices and delayed arrival of building materials.

Some developers may be hedging their bets by buying futures in building materials. But Sigman said LCOR is trying to line up contractors on its projects, which include The Charleston, a 172-unit luxury condominium at 225 East 34th Street, and a recently announced project at a former Con Edison site on Sixth Avenue between 24th and 25th streets.

"What we're trying to do is get into the market and bid these things out and sign up people to real contracts," Sigman said. "That's the ultimate protection."

Developers like LCOR, which bought property recently but is not yet in the ground, may be most at risk. Real estate experts say land prices in boroughs outside of Manhattan may be falling, meaning developers who purchased at the height of the market could only flip their properties at a loss.

"For sure, land is staying longer on the market," said Brooklyn developer Eric Brody, principal of the Brody Group, a development and consulting firm. "For sure, buyers have more negotiating power, and you can come up with more creative ways of purchasing land." Manhattan mostly a mainstay In the largest swath of Manhattan, however, conditions may not have changed as much.

"I can tell you we're still doing deals at record levels," said Eric Anton, a senior managing director at Eastern Consolidated Properties who handles many 50,000- to 150,000-square-foot properties. "But prices have leveled off a bit, especially in secondary locations, which aren't as desirable as they were four, five, six months ago."

While neighborhoods like Soho, Greenwich Village and Chelsea are still thriving, areas like the Lower East Side and "nowheresville in the 50s" may be feeling a bit of a slump, Anton said.

With the prices of larger condominium units falling and properties lingering on the market longer, that could be bad news for some developers.

"Land prices – that's kind of a cycle that drives itself," said Andrew Gerringer, executive vice president of Prudential Douglas Elliman's development marketing group. "If you paid high prices for land, then you're forced to sell at prices that are high. You're going to get yourself caught up in a situation where it's difficult to sell if the market is price-sensitive."

Some developers may be rethinking their unit mix. Procida is seeing success with the development of smaller units (see sidebar) as part of his "be@" line of apartments at Clinton West on 47th Street between 10th and 11th avenues, and Brooklyn's Boulevard East at 53 Boerum Place and 90 Williams Street.

Plus, Procida said he typically does a mix of market-rate and affordable housing, which protects him from a market nosedive.

"The affordable housing market is always there," Procida said. "It insulates you in a soft market."

Interest wanes as rates rise

Even more skittish than property developers are lenders. Procida said he believes the biggest issue facing property developers currently are interest rates that are finally creeping upward after a couple years of anticipation, making the cost of money more dear. Lenders, then, may be rethinking their lending strategies with respect to some projects.

"Before, some of the aggressive investment banks may have leant 95 percent [of a project]," Gerringer said. "Now, some of them are going to 85 or 90 percent loans, and they're lending more to the people who have experience – not necessarily to anybody who has a heartbeat."

Even so, most lenders are far off from requiring that condominium developers have a rental back-up plan – something common in the previous decade – because land prices are still too high in many areas for that to be possible, developers said.

Jeffrey Baker, senior managing director and principal of Granite Partners, a private real estate investment banking firm that has recently financed or is financing more than 2,500 units in New York, said that the current New York City market is insulated from any "bubble," and lenders are still optimistic.

"I think unit demand and pricing remains very strong," Baker said. "If there's any pushback, it's really only for what I'd consider to be more marginal projects and locations. In New York, I'll be honest, I don't see it really yet."

The tremendous shortage of condominium units, along with the massive barriers to entry and the limited speculation, buffer the New York City market in a unique fashion, Baker said.

Still, there is chatter among developers of a condominium glut that could sap the market in the $2 million to $3 million price range, Anton said.

"That's a discriminating buyer, and they don't have to buy," he said. "They can rent, they can sit, they can buy something less expensive. Unless there's something really compelling about the units – they're in a prime location or a 'starchitect' designed them – I think those units could have trouble."

"For so long, it didn't even matter," Anton said. "It was like, oh, people will live anywhere. They will, but they're not going to pay $1,000 a foot to live anywhere."

Sigman said LCOR, heeding that maxim, chose its properties cautiously.

"We looked Downtown and ended up not doing anything," he said. "There's just a lot of product being delivered Downtown, so we stayed in the Midtown markets. And we just tried to be careful about choosing visible sites – not too large."

And LCOR structured its deals to weather the equivalent of a perfect storm in New York City's real estate market. "We have institutional equity partners, so there's a fair amount of equity in both these projects," Sigman said. "So we're not as sensitive to interest rate changes."

Thus, LCOR is not feeling pressure to rush to develop its projects in a market that may – or may not – be deflating.

"You prepare for a downturn in the bones of the project," Sigman said. "It's not some last-minute effort to bail the boat."

Depends on how you read the preceding paragraph.

If you consider just the first sentence about the hyperactive market slowing down, then developers should be short futures. If you consider what follows about supply shortages resulting from Hurricane Katrina, then developers should buy futures. Except, of course, that the effects of the Hurricane Katrina shock are now past. You absolutely don't hedge past events. I can't see any economic or financial logic to hedging with a long position in futures unless one expects a continuing hyperactive market. But that's not what the first sentence of the paragraph says.

I dunno. I think the text and reasoning of the piece are garbled.

If you as a developer anticipate a slowdown, then you should be short. And if you expect things to stay hyperactive or to pickup, then you should go long. In fact, a naked long position in building futures would be the equivalent of betting on the Orion.

The article is indeed not very clear, but they may be talking about hedges that were already in place (for uncompleted construction). And it isn't a naked long position - If the futures lose value it will/should be offset by lower building costs.

Anyway, while Katrina is long gone, the rebuilding process will continue for a while. Unexpected supply constraints could boost materials prices further than a slowing housing market will cool them - at least in the near-term. If things go wrong, builders could get it on both ends - higher building costs and lower demand (and prices) for their product. An uncertain scenario of course, but for those that don’t have long-term supply contracts in place, it might be their only bet.

I walked by this site today and noticed that the deli in the crap building just north of the empty lot had a sign stating that they've moved. That's good news, as I recall that the developer wanted to acquire that dump in order to have the full block on 6th.

As the shi..tty buildings and lots are gradually redeveloped on Sixth, it could become a great avenue, as there are some magnificent old buildings on it. I hope that the crap just north of the old Limelight is redeveloped next.

I prefer a mix of old New York and new New York. Just tearing stuff down to putt up antiseptic, mediocre crap - like the stuff now lining Sixth Ave - is going to effectively kill our streetscape. Each of these new, modern buildings wants big tenants that pay big rents. The area ends up losing the smaller, unique, Mom & Pop shops, delis and single store retailers that make a neigborhood and "neighborhood." As exciting as new development is, it is destroying those aspects of New York that made it a great "town" in addition to being a great city.

I favor preserving nice old buildings. For example, I oppose the demolition of the 19th century stable which is the subject of another thread. However, a lot of older buildings are crap that should be re-developed. The building that I had in mind is on the east side of 6th and houses a luggage shop. It's an utter eyesore. There are three small buildings south of that and north of the Limelight on that block. They're nice little buildings but are dilapidated and have shi..tty stores, which should be replaced with something better.

Yet, one need only look at a CBGB to see the significance to culture that a crap building can have. The loss of the "cheap, crap" is precisely why we have the art drain and culture drain going on in this city. I love New York, but, despite the naysayers, Philadelphia is cashing in on our shortsightedness. It is the next great artist refuge - with a great city feel. It's where I'm spending this New Year's weekend.

We are in a building boom and the only consideration in the whole process is money - nothing else. There is no planning, beyond money. No planning beyond ROI. No planning at all. It is exciting to watch this stuff go up, but, as a resident, it seems there's hardly and "there" there in New York any more. It's been overrun by folks who are more concerned with high end fixtures than vibrant neighborhood scenes. People want to know how closet he nearest Starbucks will be and when Whole Foods will come to their area. The value of Historic Districts has never been more pronounced.

I agree with some of what you say. I have no problem losing mom and pop stores in Manhattan to the extent that they're cheap, run-down stores. They're not found on 5th Avenue, so, as other areas gentrify, why should they remain there. I don't think that cheap stores like bodegas add anything to an area. When my friend first moved to Notting Hill seven years ago, his street was filled with crappy, run down stores. Every year when I return, it becomes nicer and nicer. The crappy stores have all but disappeared. They've been replaced by some chains (like Starbucks) but also by a lot of independent shops and restaurants that are upscale. The new businesses have all redone the facades at street level and this once drab area looks really nice now.

Lastly, to the extent that mom and pop stores are priced out of Manhattan, there are plenty of affordable areas in the Bronx, Queens, Brooklyn, Staten Island, JC, etc. that they can move to. It would be nice to see businesses and people who are priced out of Manhattan go to these other areas and spur redevelopment there.